Penny auctions promise savings, overlook downsides

By John McCarthy, Florida Today

So-called "penny auction" sites promise the chance to land an iPad for $50, or a deeply discounted store gift card. But users can sometimes spend hundreds of dollars on these sites without winning a thing.

So-called "penny auction" sites promise the chance to land an iPad for $50, or a deeply discounted store gift card. But users can sometimes spend hundreds of dollars on these sites without winning a thing.

Impossible deals? No. But is there a catch? You bet.

Anybody who has a computer and an Internet connection has probably seen ads touting deals like those above. They come from "penny auction" sites, a Web phenomenon that has spurred hundreds of start-ups over the past year.

As consumers eager for deals help fuel the rise of these sites, consumer advocates stress the adage, "If something seems too good to be true, it probably is." Users can actually spend hundreds of dollars on these sites without winning a thing.

Penny auctions, believed to have started in Europe, operate very differently from other auction sites such as eBay.

The merchandise is being sold by the owners of the website, not third parties, for starters. The biggest difference, though, is in the bidding process. Potential buyers have to pay a fee — typically between 50 cents and $1 — for each bid they make. Auctions start at zero dollars, and each bid bumps the price up by a small amount, usually a penny, hence the name.

Auctions have announced ending times, but in an cyberworld version of "going once, going twice" new bids placed toward the end of the auction add a small amount of time, such as 10 or 20 seconds, to the auction.

Here is a how typical penny auction, say for an iPad, works:

Bidders buy "bid packages," perhaps 100 bids for $50.

The auction is announced on the website. Typically, hundreds or even thousands of auctions are held simultaneously. The terms of the auction are detailed. For example, a six-hour auction and each bid adds 1 cent to the price.

Each additional bid made in the last 20 seconds of the auction resets the clock to 20 seconds remaining.

Bidding often is slow until the waning minutes. With 20 seconds to go, the top bid might only be $1 or $2. But every time the clock nears zero, another bidder ups the price by a penny.

Finally, only one bidder remains and he or she wins the iPad, which has a list price of $500, for whatever the final tally is, maybe $25.

Since every bid costs 50 cents, and it took 2,500 bids to reach $25, the auction site takes in $1,275 ($1,250 in bids plus the $25 winning bid). Assuming the site paid full retail price for the iPad, it makes a $775 profit.

The winning bidder gets the iPad for $25 plus the cost of the bids he made and shipping. The other bidders, some of whom may have spent $100 or more on bids, walk away empty handed.

But even the winner might not come out ahead of the game, advocates suggest. Say the winner bid $25 and used $50 in bids. At $75 for a $500 iPad, that still seems like a good deal.

But that doesn't take into account all the money in bids the winner spent in auctions he didn't win. Add that in and the deal might not be so good; in fact it could mean that he spent more than the retail cost of the iPad.

'Like gambling'

It didn't take Andrew Whitaker of Titusville long to figure out that such deals aren't necessarily as good as they might seem. "It is just a gimmick. They get you caught up in it. It is like gambling."

After hearing about one site six months ago, he decided to give it a whirl. He started small and actually won an auction for an oscillating fan for about $15.

That was the only auction he won. He tried four or five more auctions over the following couple of weeks, but got nowhere. More often then not, the auctions were still continuing when he finally dragged himself off to bed. He figured that he was competing against bidders on the West Coast, where it was three hours earlier.

All told, he spent about $100 before deciding penny auctions weren't for him.

"I felt 'lesson learned,' " Whitaker said.

Whitaker is not the only person who has likened penny auctions to gambling.

In November, an Oregon man filed a federal lawsuit alleging that one of the largest auction sites, Quibids.com, was really a gambling site masquerading as an auction site. The suit seeks class-action status and asks for damages for everybody who lost money at the site.

A Quibids spokeswoman said the suit is without merit.

"We are not a gambling site," Jill Farrand said. She also points out that losing bidders can buy the item for its listed retail price, minus the amount they spent bidding. "There is no secret to the model. We try to be as transparent as possible," Farrand said.

Brian Kongszik, help line director for the Florida Council on Compulsive Gambling, said penny auctions really are thinly disguised gambling sites. "They are risking something in an event of uncertain outcomes, which is gambling," he said.

Kongszik said the council had only had a few calls from people seeking help because of penny auctions. Still, he said, he could definitely see the attraction for problem gamblers. 'I can see people losing a significant amount of money on these and getting caught up in it, in the rush. It is a rush."

Sitejabber.com, which features user-reviews of websites, has had a huge uptick in complaints about penny auction sites over the past year, said founder Jeremy Gin. But it is not only the gambling aspect that is troubling about penny auctions, Gin said. There have been plenty of allegations that some sites use shill bidders or automated programs to drive up the bidding. And supposed penny-auction review sites have popped up that are really nothing more than means of redirecting users to certain penny auctions.

Gin's advice for someone considering trying penny auctions?

"If you decide to play, be prepared to lose your money."

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What to watch out for

•Shills: When the employees, owners and friends of a penny auction make bids so they can attract more bidders to the auction.

•Bid bots: A program that bids on many items or a single item over and over again, looking to obtain enough money to pay for the auction item and then release it to a real bidder.

•Scams: Some penny auction sites will possibly steal a bidders money and not ship the item that was won.

•Spending: For bidders, a lot more money is likely to go into the auction than they will ever see in return, similar to a slot machine in a casino.

Source: Sitejabber.com

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